Budget - The Last Word?
Since writing in May 2006, there is some good news to report. It seems that the Treasury Team tabled some amendments to the Finance Bill in Committee, quietly changing some of the worst excesses of this Budget insofar as it attacks trusts. Sadly the changes do not go very far, and there will still be a tax charge where hitherto there was not, and it seems that Mr. Brown and his team are still determined that the only good reason for not letting little Jimmy have his inheritance at 18 is to save tax. It is to be hoped that subsequent Governments will see sense and reverse this silly legislation.
You may recall that the changes to Accumulation and Maintenance Trusts meant that they were taxed under the Discretionary Trust tax regime. Thus if a Will or Trust Deed provided for Accumulation and Maintenance Trusts with capital being paid at age 25, the Budget provided that from the moment the trust took effect, i.e. on the death of a testator or on the execution of the appropriate trust document, then to the extent that the trust fund exceeded the nil rate band, the trust was within the Discretionary Trust tax regime. That provides that there is a 6% tax charge every 10 years, and a 10 year period is divided into 40 equal quarters so that if funds are taken out then an appropriate exist charge can be calculated to the nearest quarter. The most recent amendment means that the trust will enter the Discretionary Trust tax regime when the beneficiaries are 18 and not before. There will therefore be a 7 year period. Because this is not the full 10 years then 6% will not be paid, and the tax liability is therefore reduced to 4.2%.
Similarly the Chancellor appears to have backed down on the taxation of Life Interest Trusts for spouses, particularly second spouses. It is worth bearing in mind too that all this legislation now affects same sex couples who enter into a Civil Partnership.
The legislation has not affected the use of the Nil Rate Band Discretionary Trust, a mechanism in a Will which attempts to ensure that on the death of one spouse, with the estate passing to the survivor, the nil rate band of the first to die is not lost. Briefly, this is managed by transferring value equivalent to the nil rate band on the first death, into a Discretionary Trust where the surviving spouse is a potential beneficiary and therefore along with other potential beneficiaries may benefit at the discretion of the Trustees. Because the surviving spouse is not entitled to benefit, as he or she would be, for example, an Interest in Possession Trust, then on the survivor’s death, the trust fund is not added to his or her estate for the purposes of Inheritance Tax, but rather passes free of tax to the ultimate beneficiaries. At present the nil rate band is £285,000.00. Bearing in mind that the tax rate for Inheritance Tax is 40% it will be readily seen that using the Nil Rate Band Discretionary Trust will save £114,000.00 in inheritance tax. The Nil Rate Band is set to increase each year, although not by much, and we already know that from the beginning of the next tax year, the Nil Rate Band will move up to £300,000.00, and thus, assuming a 40% tax rate, the saving available by using a Nil Rate Band Discretionary Trusts increase to £120,000.00.
My experience is that increasingly married couples are wanted to use this scheme to ensure that as little inheritance tax as possible is paid. It can be a complicated scheme and it does need to be properly drafted and explained. I would urge would be tax planners to ensure that they get appropriate legal advice. I previously did an article explaining the difference between a joint tenancy and a tenancy in common. Where a couple own their property as joint tenants, then in order to properly deal with the Nil Rate Band Discretionary Trust scheme they will need to sever the joint tenancy, creating a tenancy in common.
